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South Korea's finance ministry has warned that rising oil prices and geopolitical tensions stemming from the conflict in the Middle East are increasing downside risks to the economy, weighing on consumer and business sentiment.

In its monthly economic report, the ministry said Friday that the economy faces "increased downside risks due to the expansion of geopolitical risks" from the conflict. The assessment heightens the ministry's previous warning from last month, when it only noted potential fallout.

Coverage comparison

Two reports from Yonhap News, South Korea's leading wire service, cover the government's assessment of the economic risks. The first, published April 17, details the finance ministry's monthly economic report, which warns of rising inflation and downside risks to a range of indicators including consumption and investment. The second, dated April 7, cites the state-run Korea Development Institute's (KDI) monthly assessment, which similarly highlights the risk of supply chain disruptions and higher oil prices.

Both reports note that consumer prices rose 2.2 percent in March from a year earlier, up from a 2 percent increase in February. Both also point to the Middle East conflict as the underlying cause of the economic challenges, with the finance ministry highlighting that the government will maintain an emergency economic response system to minimize the impact.

The KDI's warning, issued earlier this month, was more explicit about the potential for a broader impact, noting that "facility investment may face constraints, while construction investment could be negatively affected by rising costs linked to the conflict." The ministry's report, issued later, echoed similar concerns.

Key claims

  • Consumer prices and sentiment: Consumer prices rose 2.2 percent in March from a year earlier, according to both reports. The consumer sentiment index fell by 5.1 points from the previous month to 107 in March, marking the largest drop in 15 months, as reported by Yonhap.
  • Export growth: Exports surged 48.3 percent year-on-year in March, surpassing the US$80 billion mark for the first time, driven by strong semiconductor demand. This was reported in the finance ministry's coverage, but the KDI report also noted that "exports have maintained strong growth, particularly driven by solid demand for semiconductors."
  • Government response: The finance ministry said the government will maintain an emergency economic response system to minimize the impact of the conflict. This was not mentioned in the KDI report.

Perspectives

The economic outlook for South Korea is now closely tied to the trajectory of the Middle East conflict. The finance ministry's report said that while exports and private consumption had been improving, "heightened uncertainties and rising global oil prices have weakened consumer and business sentiment." The KDI echoed this, noting that "rising oil prices could weigh on consumption, while supply disruptions and weakening demand may also affect exports."

There is a note of caution, however. Inflation remains close to the Bank of Korea's 2 percent target, and officials attribute the modest increase in March to the government's fuel price cap and lower volatility in fresh food prices. They warned that upward pressure could build as the conflict's impact spreads.

The Middle East conflict, which began in late February, has escalated into a broader regional war, roiling global financial markets and pushing up oil prices. For South Korea, an energy-importing nation, the risks are clear. As the KDI noted, "the economy, which had shown a gradual recovery, is now facing heightened downside risks due to surging oil prices and growing global supply chain uncertainties."

The government's emergency response system, as announced, will be key to mitigating the impact. But with consumer sentiment at its lowest level since May 2025 and the largest drop in 15 months, the path forward remains uncertain.